2 annuity routes to income for life

In their quest for lifetime income that can outpace inflation, baby boomers and seniors are being pitched two alphabet-soup variable annuity guarantees: GMWBs for life and GMIBs.

These stand for guaranteed minimum withdrawal benefit and guaranteed minimum income benefit. They are part of an ever-evolving breed of "living benefits" tacked onto variable annuities, which are tax-deferred, mutual fund-like investments within an insurance wrapper.

The benefits, for which you pay a continuing additional fee, guarantee that you, or you and a beneficiary, will receive a minimum lifetime income regardless of how your annuity investments fare.

These products can be dizzyingly complicated, involving not only decisions on what investments to pick and when to start taking an income stream, but also frequently complex tax- and estate-planning considerations and analysis of benefits versus costs.

Don't buy one unless you understand it thoroughly and receive unbiased advice from a qualified professional, preferably one who doesn't stand to gain or lose anything whether you buy or not.

Nobody can, in the space of a newspaper column, explain everything you need to know about these annuities. But I want to at least explain the basic differences between the GMWB for life and the GMIB, an area of much confusion and misunderstanding.

With a GMWB for life, the insurance company issuing the annuity guarantees that you can withdraw for life at least a percentage of the amount you invest, often 5 percent.

For example, if you invest $100,000, you can withdraw $5,000 a year for life, no matter how your investments perform. (You can always withdraw more than 5 percent but then the lifetime withdrawal guarantee would be reduced or lost.)

In this example, as long as you don't withdraw more than $5,000 a year, you will continue to receive the lifetime payments even if your actual account value goes down to zero. In that event, the insurance company will continue to pay you out of its own money.

When this benefit initially was offered, the guaranteed-for-lifetime withdrawals covered only the person investing in the annuity. Many insurance companies since have added the option, for a slightly higher continuing fee, of extending the lifetime withdrawal guarantee to the investor's surviving spouse.

`Peace of mind'

"We realize peace of mind for many couples comes from knowing a spouse will be taken care of financially" after one dies, said Mark Phelan, a senior vice president of Nationwide Financial, one of the companies offering the spousal guarantee.

To many financial advisers, the biggest attraction of the GMWB for life is the potential to lock in higher lifetime withdrawals if your investments do well. While details vary widely, these annuities typically allow you to periodically "step up" the amount you can withdraw for life if your account value has increased sufficiently.

"Many of these annuities are incorporating these features on an annual or five-year basis," said Tucker Scott, a financial adviser with Oldham Resource Group Inc. in Norwalk, Conn. Knowing that the amount you can withdraw could go up but can't go down helps investors cope better with market volatility, he said.

Waiting period

With a GMIB benefit, rather than withdraw money from your account, you must annuitize it, that is, give up access to your principal in exchange for lifetime payments to you or you and a beneficiary. The company guarantees a minimum lifetime income regardless of investment performance or actual account value.

In general, the older you are when you start receiving the income, the higher it is. (Typically, to be covered by the guarantee, you must wait at least 10 years after you invest to annuitize.) Again, such a guarantee can encourage conservative investors to venture into stock funds and reap potentially higher and inflation-beating returns.

While many companies marketing guaranteed-minimum-withdrawal-benefit products trumpet the benefits of not having to annuitize, the products are more similar than it may appear at first glance. In either case, the benefit is a safety net you won't need unless bad investment results deplete your account.